The LLC is Best!
There's no one legal structure that works best for
all businesses. The most favorable choice depends on a number of
factors, including the number of owners, your tax situation, and
whether or not you have employees. A limited liability company (LLC)
may be a good choice because it provides flexibility, low
maintenance, favorable tax treatment, and most importantly, limited
liability protection to keep your
A properly-organized LLC combines some of the
aspects of partnerships and corporations into one entity. For
example, partnerships and sole proprietorships generally have no
insulation from liability. But by statute, a member of an LLC has
limited liability and no personal responsibility for the debts or
liabilities of the entity or the other members.
personal assets safe.
Dodging a Double Tax Hit
An LLC can help avoid double taxation if you sell the company
or some of its assets. Let's say your company buys a warehouse
and later sells it, making a profit.
As a C corporation: You're liable for a
combined federal and state tax bite of as much as 40 percent.
You can take the gain left over after paying corporate level
taxes as salary or a dividend
If you take the
money as a dividend, your company loses a deduction and you
pay personal taxes on the cash. Add your personal tax bill to
the corporate tax bill for the combined total. If you take the
money as salary, your company keeps its deduction, but now
payroll taxes kick in.
LLC: You are taxed only on your personal return
and at low capital gains rates.
LLCs can work
well for family businesses that have exposure to product or other
liabilities, real estate enterprises, and service companies.
You need to discuss the specific benefits of various business
structures with your tax adviser, keeping in mind that the laws
regulating LLCs vary from state to state. Here is a list of general
LLC issues to consider:
companies avoid double taxation. Like an S corp or a partnership, an
LLC is a tax "pass-through” structure — it files a federal tax
return, but passes through all of its tax profits or losses, to its
members, who then pay tax on their personal returns. Under a C
corporation structure, your company pays taxes on its earnings and
then you pay again if the company's post-tax earnings are
distributed to you as dividends.
like S corps and partnerships, distribute income to their members
and the money isn’t considered wages by the IRS so there are no
employment taxes. However, a member who is active in the business
and treated like a partner has to pay self-employment taxes. And, if
the IRS thinks you're trying to avoid self-employment taxes, you can
expect to hear the taxman at your door. Of course, you must pay
employment taxes for your employees.
Forming an LLC requires several steps: Your attorney files
an Articles of Organization or
Certificate of Formation with the state and pay a
fee. The Article or Certificate is the public notice of the LLC
formation. It is the "cover page" of your LLC. Your
attorney also creates an Operating Agreement
among the members. This document establishes members' rights, the
percentage of ownership and the share of profits.The terms of the
Operating Agreement are not standard and requires creativity in
drafting to maximize the flexibility of the LLC. Owners can
include corporations, partnerships, other LLCs or trusts. An
operating agreement should also contain provisions for the company's
management structure and any other financial details you want, such
as ways to use the LLC in estate planning.
In nearly every state, you can form an LLC with just
one person but there's no limit on the number of members you can
have. In theory, all members can participate in managing the
company. But smooth operations normally depend on a centralized
management to ensure good communication and the ability to reach
consensus. In your operating agreement, you can designate one or
more owners (or even an outsider) to take on daily management
LLC members aren't personally liable for the
company’s debts or obligations. However, this is not blanket
protection. Members may still be liable for debts if they personally
guarantee them. And they're liable for their own professional
malpractice, if they personally injure someone, don’t deposit taxes
withheld from employees' wages, or use the company to conduct
personal business. Beyond that, members are liable only up to the
amount of their capital contributions and the amount they agree to
contribute to the firm's capital.
on state law, an LLC could go out of business upon the death,
insanity, bankruptcy, retirement, resignation or expulsion of a
member. The remaining members would have to wind up business and
distribute assets among themselves. You can avoid this by including
in your operating agreement a "buy-sell" provision to provide
guidelines in the event a member is no longer involved.
An LLC's tax advantages, combined with corporate insulation from
liability and estate-planning benefits, can make it a suitable and
cost-effective alternative to other business models. Call Ronald J.
Cappuccio, J.D., LL.M.(Tax) at (856) 665-2121
to talk it over.